LOS ANGELES — Republicans and Democrats have reached a tentative agreement that may solve one of the key issues in the lame-duck congressional session: how to deal with the expiring George W. Bush-era tax cuts.
Q: What are the Bush-era tax cuts and why could they expire?
A: The cuts passed by Congress in 2001 and 2003 are set to expire Dec. 31 if Democrats and Republicans cannot reach a compromise.
Republicans wanted the cuts to be permanent when they were passed, but they lacked the political muscle to prevent a possible filibuster by Democrats. So Republicans rolled the cuts into a reconciliation bill, which under Senate rules would be valid for only a decade. The cuts have been a sore point between the parties and a philosophical and campaign divide ever since.
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Q: What are the details of the agreement?
A: The tentative agreement extends the Bush-era cuts for all Americans, coupled with an extension of jobless benefits.
In addition, it provides a payroll tax cut of 2 percentage points to get more cash into consumers' pockets.
That means employees will pay 4.2 percent to Social Security instead of 6.2 percent. A worker who earns $40,000 a year would get $800 over the year; a worker who makes $70,000 would get $1,400.
Q: What are the income tax cuts?
A: The cuts affect investors, small-business owners and individuals who file federal tax returns.
If nothing is done, the lowest bracket, now 10 percent, would become 15 percent, and the highest bracket, 35 percent, would expand to 39.6 percent. The three intermediate brackets would also increase to what they were before the cuts were passed.
But the current debate has been politically framed as a battle between the rich — those earning at least $250,000 a year — and the middle class. In this debate, middle class has been defined as individuals earning no more than $200,000 annually or families earning $250,000 a year or less.
Q: What are some of the other taxes at stake?
A: Other key taxes and deductions could change if the package is not extended. The so-called marriage penalty, additional money paid by some couples compared with what individuals pay on the same income, would return.
The child tax credit would be cut in half to $500 per child. The dependent care credit would end and the tax for heirs would be reinstated.
The plan also extends increases in the tuition credits adopted in the 2009 economic stimulus package that were set to expire.
Q: If the cuts expired, what would be the effect?
A: Republicans and Democrats seem to agree that the tax cuts should be extended to the 98 percent of American filers who earn less than $250,000, and to the first $250,000 of those in the wealthy group.
Republicans argue that the cuts should be extended for income above $250,000 as well, in part to protect small businesses. The additional tax cuts on dividends, interest and estates should be maintained as well, the GOP says.
Democrats argue that the country cannot afford to extend the cuts for the rich. The federal government estimates that it will cost $4 trillion over 10 years to extend the cuts for the middle class. Adding the wealthy increases the cost by an estimated $700 billion.
Numbers that large have become pawns in the political battle over deficit reduction and the expected fight to cut entitlements, the areas that have been targeted by conservatives. Liberals argue that extending the Bush-era tax cuts for the rich is economic suicide. The cost over 75 years would be more than three times the entire projected Social Security shortfall, they say.